What EVERYONE gets wrong about trade!
What EVERYONE gets wrong about trade!
Trade and trade deals between the USA and other nations have been a convenient whipping post for populists for some time. Ross Perot famously campaigned for president in opposition to the soon to be ratified NAFTA trade agreement between the USA, Mexico and Canada. Populists from Bernie Sanders to demogogues like Donald Trump have railed against trade and trade deals as “bad for Americans.” Trump pushed for a new trade deal to replace NAFTA, installing the USMCA trade agreement effective July 2020 which ultimately wasn’t much more than a tweak to NAFTA.
At issue for most Americans is that trade agreements facilitate job losses in the USA. This is arguably true. One example is the textile industry.
“From 1994 to 2005, the United States lost more than 900,000 textile and apparel jobs to offshoring. Since the 1960s, low wages and new industrial production capacity in countries such as China, India, and Brazil made textile production in the United States a losing proposition. Most U.S. textile companies either shutdown or moved abroad” (1) Similar statistics can be cited for nearly any industry.
One factor in protectionism is tariffs. This is a tax on goods coming into the country. However, a company won’t simply re-locate back to the USA from, say, China just because the US government slaps a tariff on the product. The tariff tax will be built into the price of the product and be paid for by American consumers!
Back to the textile example. When the textile & apparel industry moved overseas, Americans could now buy t-shirts much cheaper. Jobs were lost to thousands of workers, but millions received the benefity of less expensive goods from clothing to electronics, etc.
Adam Smith, the father of modern economics and author of Wealth of Nations, and David Ricardo both discuss the concepts of “advantage” in trade.(2)
Smith leaned toward a focus of “absolute advantage” in which a nation which has an absolute advantage in production of a particular product. For example, could olives grow in Ireland? Sure, but to get them to grow at a cost that is justifiable is not as likely as the cost to get olives grown in Italy. So why grow olives in Ireland when one can get them far cheaper by just importing them from Italy.
Ricardo brought into the field the concept of comparative advantage: the ability of an individual or group to carry out a particular economic activity (such as making a specific product) more efficiently than another activity. Comparative advantage really appears to be an extension of absolute advantage at a smaller level.
So some countries have an advantage (either absolute or comparative) in producing things far less expensively than we do. This is a boon to American consumers and should be considered as a benefit of trade
Now let’s review some of the negatives on which we touched earlier:
a) trade which moves industries to lower costs locations can cost job losses and dislocation for workers in the USA
b) off-shoring to countries with lax labor protectons is means workers are abused and taken advantage of in another country
c) off-shoring to countries with lax environmental regulations leads to pollution which affects the entire planet
Businesses moving production to cheaper labor locations or less environmental regulation has cost Americans significant job losses. But is the answer protectionism?
I think the solution is more complex but readily available!
First, as to items (b) and © above, the USA can implement laws and regulations to tax corporations for the harm they cause regarding pollution and labor abuse when they do so to avoid our regulatory environment. Their product can also be banned, if necessary.
As to (a), the real problem with off-shoring jobs isn’t that Americans lose jobs here. It’s that our government and economic system are so mired in neo-liberal, free-trade, lassiaz-fair ethos that there has been NO impetus, other than band-aid actions, to address the issue. Early on, as jobs were lost, there was some unemployment payments for a few weeks until workers were forced to often take jobs at lower pay and benefits than the job they lost. Later, initiatives were implemented for “job training” as a means to get workers back into workforce by changing their skills. But this is like plugging one hole in a leaky faucet as other holes pop open and begin leaking.
In 1997 I attended an ‘advanced manufacturing” conference in Detroit. I went primarily because the keynote speaker was George Gilder, famously the author of “Wealth & Poverty.” But he was also a ‘futurist’ thinker. In his speech he expounded on how eventually we’d have devices in our hands for which we would not need computers, but instead would download apps, use them, and release the app and data from the device. Wow, modern cell phones and the cloud!
In any event, the statement that stuck out to me as an engineer was when he said: “Don’t solve problems. Change the landscape of the issue and the problem goes away.”
We need to change the landscape. We need to stop trying to rebalance trade as if it will really ever solve the changing nature of manufacturing in which jobs come and go. We can address the issues for which we now spend money on unemployment and job training. Along the way we can eliminate a myriad patchwork of social safety net programs such as food stamps, etc. How can we do this?
Implement Universal Basic Income. (3)
The current system of unemployment, training, food stamps and other safety net issues suffers from several deficiencies. First, most are administered by states which apply differing standards to the various programs resulting in a worker in Alabama suffering under a stingy system versus a Californian who may have a more generous safety net. Why should two Americans be treated so differently merely due to geography?
The link below has a good exposition of some of the benefits and drawbacks and of course the details would have to be hammered out legislatively but there is no doubt in my mind this is a feasible approach.
Along with revising the tax code to return to a more progressive approach (as well as tax capital gains the same as income) we can pay for this.
As an initial example of how this could work, let’s say the decision is to give every American $1000 per month. This can be facilited by the IRS using tax documents. A family of four would thus get a $4000 check. If the tax filing is for a single parent and three children, the $4000 is applied to that parent’s taxes. Every American would get it rich or poor. Warren Buffet would get a check. Of course, not that he needs it, but trying to means test is one of the pitfalls of our current social safety net. Just send the check.
On the backside, that money would be considered income on one’s tax filing. If the family of four’s parent was working and made $12/hour working 32 hours a week for 52 weeks that taxpayer’s gross income would be just undre $20,000. The UBI checks would bring their income up to 68,000. This would be their GROSS income on their taxes which would then be affected by deductions etc. Just as now the adjusted gross income becomes the taxable income. But with a progressive tax table the parent of a family of four would not pay as much in taxes on their much lower income, but a Warren Buffet would pay a higher tax (and higher marginal tax) on his income which also in cludes the added $48k. Those taxes get recycled back into the system and pay for future UBI checks raising the standard of living of all citizens, reducing bureaucratic overhead, making the system fair and equitable for those in California as well as Mississippi.
Now it could be argued that some people would just stop working and get a free ride. Perhaps. But then the job they would have taken would be taken by someone else reducing actual unemployment. Additionally, those people that really want to get ahead are still going to work with their UBI as a safety net for job changes or attendance in college or other training and education.
Finally, UBI in conjunction with Single-Payer health care would free up more people to be more entrepreneurial, facilitating a dynamic economy.
FOOTNOTES
1. https://www.areadevelopment.com/advanced-manufacturing/Q2-2017/textile-industry-making-comeback-in-US-southeast.shtml
2. https://en.wikipedia.org/wiki/International_trade_theory
3. https://www.newyorker.com/magazine/2018/07/09/who-really-stands-to-win-from-universal-basic-income
